Chasing High Dividend Growth Rates For Higher Total Returns

by: Brian Ditchek


Can investing in quality stocks based on the relative magnitude of the most recent dividend increase result in strong total returns?

To answer the question two portfolios are examined.

Portfolio 1 contains 14 dividend aristocrats and maintains the investments over a 15 year period.

Portfolio 2 maintains only 7 of the 14 stocks selected each year based on the highest dividend increases announced that year.

The results suggests total returns can be improved by chasing dividend growth leaders.

The relationship between dividend growth rates and total returns fascinates me. In a recent article, I explored this relationship with dividend aristocrats (stocks that have increased their dividend for each of the last 25 years at least) and provided evidence that groups of dividend aristocrat stocks with higher dividend growth rates yielded higher total returns over the past 25 years than those with lower dividend growth rates. In that article, stocks were held over a 25 year period and the total returns were correlated with dividend growth rates. The question this article tries to address is whether a total return advantage can be had by chasing the highest dividend growth stocks. That is, if we sell stocks that announce a low dividend growth rate in a particular year even though the previous year that stock may have been a dividend growth leader, and put the money into stocks that announced a higher dividend growth rate, would the value of the investments trend higher.

In this article 14 dividend aristocrats are analyzed over a 15 year period, from the end of 1999 to the end of 2014. These stocks were selected from groups 6 and 7 from the previous article. They are the 14 dividend aristocrat stocks with the highest growth rates among the 49 analyzed in the previous article. The 14 stocks are listed here: (T.Rowe Price, TROW, Sysco, SYY, Nucor, NUE, Medtronic, MDT, Lowe's, LOW, WalMart, WMT, Cardinal Health, CAH, Sigma-Aldrich, SIAL, Franklin Resources, BEN, Illinois Tool Works, ITW, Automatic Data Procesing, ADP, Archer-Daniels Midland, ADM, Aflac, AFL, McDonalds, MCD).

Two investment cases are examined. In both cases $140,000 is the initial investment.

In the first, $10,000 is put into each of the 14 stocks starting at the beginning of the year 2000 and held there without any adjustments until the end of 2014.

In the second case, $20,000 is invested in the 7 of the stocks which had the highest dividend increase among the 14 stocks relative to the dividends awarded in year 1999. Then each year after stocks are sold and bought in order to align with the stocks that had the highest dividend growth each year. In the table of the 14 stocks below, the stocks with the 7 highest dividend increases relative to the prior year are highlighted in green for each year. At the bottom of the table, the last row shows the minimum dividend growth rate needed to be included in the investment portfolio for each year. The dollar value of the stocks that are sold in any given year is reinvested in the dividend growth rate (DGR) leaders for that particular year in order to keep the total number of stocks owned at 7.

For instance, of the 7 stocks that were bought at the beginning of 2000 and owned throughout the year 2000, two are sold at the end of 2000, TROW and LOW, and two are bought in equal dollar amounts at the same time WMT and CAH. The other 5 stocks are maintained. In 2002, CAH and WMT are sold because their dividend growth did not make the grade and BEN and ADM are purchased. This same policy is repeated each year, chasing the 7 stocks with the highest dividend growth increases. In this way, the lowest minimum DGR achieved in any year on any stock is 8.0% (2002 and 2010) and the highest DGR is 35.1% (2007) (see the last row of the table).

(Source: dividends awarded in each year are taken from Yahoo Finance. Only regular dividends are included in this table)

The graph below shows the total value of the portfolios over this 15 year period, starting at the end of 1999 for both cases. It should be noted upfront that this was a difficult period for stocks, with the technology bubble crash, 9/11 and the Great Recession impacting stock values. Throughout this period the S&P500 total return compound annual growth rate, CAGR, was only 4.4%.

Both portfolios start with $140,000. But at the end of 2014, the fixed 14 dividend aristocrat portfolio has $663,000 for an average 10.9% CAGR, and the variable 7 dividend aristocrat portfolio has $1,007,000 for an average 14.1% CAGR. Both portfolio returns are great relative to the S&P500, but the portfolio that chased the highest dividend growth increases delivered significantly better performance. I believe this shows some evidence that chasing high dividend growth rates can be a smart investing strategy. Note that selection of the stocks did not involve sweating the latest earnings report or some analysts economic forecasts. It just focused on the annual dividend growth announcement and limited the potential choices to quality stocks with a long record of dividend growth.

(Source: Total returns each year are calculated from the adjusted prices in Yahoo Finance. In this case, of course, the special dividends that may have been awarded are captured as well.)

The total return calculations for the 7 variable stock picks are made with the benefit of an historical view. Though stocks are switched out in between that short period (when exchanges are actually closed) between the close of a trading year and before the beginning of the next trading year, stocks actually make their announcements of dividend increases at various times throughout the year, so, in practice, the exchanging of stocks based on dividend increase announcements would actually happen at various times throughout the year. Nevertheless, I do believe the conclusion is valid. The technique used still shows that chasing stocks that have announced the highest dividend increases among a group of high quality stocks like dividend aristocrats is still true.

The analysis also raises some additional points which are highlighted in the following bullets:

  1. For the 14 stocks considered the average annual dividend growth rate was 16.4% over this 15 year period.
  2. For the 14 stocks considered, the year with the highest dividend growth rate was 2007, for a DGR of 35.1%. The years with the lowest dividend growth rate was 2010 and 2002, when it was 8.0%.
  3. For the 7 stock portfolio, the average annual dividend growth rate was 24.3%, about 8 percentage points higher than for the fixed 14 stock portfolio.
  4. For the 7 stock portfolio, the year with the highest dividend growth was also 2007 at 45.3%. The year with lowest dividend growth rate was also 2010, but with an average DGR of 11.1%.
  5. The LOW stock was held for 12 of the 15 years, suggesting it was the most consistent at raising dividends significantly. Other high dividend growth leaders were CAH with 11 years and MCD with 10 years.


Investing in only the highest dividend growth rate stocks may be a good strategy for those investors seeking high total return. The technique may not be appropriate for investors that must emphasize high dividend yield rather than dividend growth because they need to live on the income. But for investors building a retirement nest egg over a 15 year or greater time period, it could be a winning strategy.

Disclaimer: The author has presented an analysis of dividend growth stocks. No consideration of tax consequences or the cost of each trade has been considered. The article represents the author's opinion only and should not be construed as a recommendation to buy any stock or group of stocks. The author is not a certified financial planner. Readers should do their own analysis and make their own investment decisions and consider the use of a certified financial planner.

Disclosure: The author is long TROW, ITW.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.